Catalyst with Shayle Kann - 2024 trends: batteries, transferable tax credits, and the cost of capital

Episode Date: February 8, 2024

We’re back for round two, with even more slides than last year. This year’s annual slide deck from Nat Bullard has 200 pages on the key trends shaping decarbonization in 2024. Nat has worked as an analyst and writer in climate tech for two decades and was BloombergNEF’s chief content officer until 2022. We’ve split the conversation into two parts. In this first part, Shayle and Nat cover topics like:  The state of batteries, including the rapid growth of LFP chemistries, the concentration of manufacturing capacity, and the wild ride of lithium prices. The rapid growth of transferable tax credits and how that unlocks capital for renewables. How the rising cost of capital has reshaped climate tech. Recommended resources: Nathaniel Bullard: Decarbonization: Stocks and flows, abundance and scarcity, net zero Latitude Media: Clean energy capital is getting pricier WSJ: Companies Are Snapping Up New Clean-Energy Tax Credits Catalyst is supported by Antenna Group. For 25 years, Antenna has partnered with leading clean-economy innovators to build their brands and accelerate business growth. If you’re a startup, investor, enterprise or innovation ecosystem that’s creating positive change, Antenna is ready to power your impact. Visit antennagroup.com to learn more. Catalyst is brought to you by Atmos Financial. Atmos is revolutionizing finance by leveraging your deposits to exclusively fund decarbonization solutions, like solar and electrification. Join in under 2 minutes at joinatmos.com/catalyst.

Latitude Media, podcast at the frontier of climate technology. I'm Shale Khan, and this is Catalyst. There's a persistent, cheeky header that I keep using on these slides, which is markets respond to incentives, and then in parentheses again. People keep thinking that when I say that, that I mean that they respond to positive incentives, but markets respond to negative incentives, too. Well, it's that time of year when I grab a cup of tea

wishing it were coffee, sit back, put my feet up, and read Nat Ballard's 200-page slide deck on trends and decarbonization. When utilities need flexible capacity they can count on, they turn to Energy Hub. Energy Hub works with more than 170 utilities, coordinating over 2.5 million devices to manage 3.4 gigawatts of flexibility built for the moments when utilities can't afford uncertainty. Energy Hub builds and operates virtual power plants that utilities actually stake their grid planning on, coordinating EVs, batteries, thermostats, and more through a single platform built for utility scale. Predictive, verifiable, and designed to perform when it counts. Learn more at energyhub.com.

Trillions of dollars are flowing into clean and critical infrastructure, but those investments aren't driven by technology alone. They're shaped by markets, by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, and host of a brand-new podcast, Critical Capital. Each episode, I talk with people deploying capital, shaping policy, and building the clean economy. Tune in as we unpack how progress is actually made. Listen to Critical Capital on Spotify, Apple, or wherever you get your podcasts. Catalyst is supported by Fishtank PR, an award-winning PR firm focused on climate and energy tech, renewables, and sustainability. Fishtonk is known for generating prominent and effective media coverage for the brands they work with. If you want a PR

partner that's thoughtful, shoots straight, and gets results, you'll like Fish Tank PR. To learn more about Fish Tank's approach, visit fish tankpr.com. That's F-I-S-C-H-Fish-Tankpr.com. I'm Shail Khan. I invest in revolutionary climate technologies at Energy Impact Partners. Welcome. Well, we're back. This is year two of the now and future annual tradition where my buddy Nat Bullard and I dig through my favorite tidbits from his kind of ridiculously long and data-filled decarbonization trends deck. This one has it all. We talk power, emissions, finance, batteries, ESG, molecules, land use, other things. It's a two-parter. So here's part one, and we'll be back next week with the second half. Nat, welcome back. Shale, it's great to be back. Thanks for having me

back again. And I'm trying to count down how many times this is. I'm I think this is number four. Number four on the pod seems right, but number two of this now annual tradition of me carefully cultivating and picking and choosing the best amongst your many, many slides on decarbonization that you put out each year. So I counted, so this is a 200-slide deck report.

I don't know what you want to call it. 200 even. Yeah, 200 even, yep. So I picked 30, which is more than we're going to be able to get through over the course of two episodes right now, but let's see how many we can get to. And I also, I sort of categorize them, right? Like I put them into some buckets. So let's just do it. First bucket is what I'm calling things that are actually going quite well, CODA, that you might not realize they're going as well as they are. The first one actually is to me, like the one that I feel like I should have known, but absolutely did not know, which is, and

I'll ask you this. Before you had seen this data, if I had asked you, what is the current trajectory of greenhouse gas emissions per capita globally? Like, would you have known the answer to that? So you're asking probably the wrong person for that. Because you've been looking at this data? Yes, I've been looking at it for a while. But it's all part and parcel of a kind of what I had is sort of a subtitle on this earlier, which is like, what's the deal with 1973? is that actually there's this profound year in not just the global economy, but particularly in the energy economy, brought on by the oil shocks of the 1970s, that introduced some really fundamental changes in like the way that we approach deficiency,

in what we consume and things like that. And the result is that on a per capita basis, we had all greenhouse gas emissions peak in the 1970. In particular, methane and nitrous oxide emissions were peaking in the 1970s. CO2 emissions didn't peak into well into this century per capita, but all of them equivalent peaked back then. And the reason I say, like, I saw this in the 1970s as well. And other data is that that's also when the energy intensity of GDP in the developed world peaked.

So they are kind of related. The trick is that they haven't really gone down that much. Right. an interesting line, right? Like, they peaked in 1973. If you're looking at all greenhouse gases lumped together, peaked in 1973, that's definitely the thing I wasn't aware of. And they've been flat-ish, I guess slightly down, basically over the past 50 years since then. Yeah. But that is crazy. Obviously, we've had population growth, and that's why, you know, raw greenhouse gas emissions have grown. But on a per capita basis, they've been me, more or less flat.

More or less what? And it's an important thing to note that it is possible to make changes. And it gets to my sort of, you know, one of my themes throughout this is that like the only way to change these levels in the long run is to crank down on doing the good stuff. You know, crank down on doing the things that make a big change. That's efficiency. That's, you know, things that have lower emissions or whatever. But try to move these as much as possible because now you're in the sort of a race between population growth and inherent rates of decline per capita. in XYZ consumption of whatever or emissions of whatever. Right. All right, let's talk about another thing that's going well.

This one may be more that people, at least who are listening to this podcast, probably know to some degree, but this is where you and I get to wax nostalgic for a minute. So let's talk about solar. In 2023, the estimate is that about 440 gigawatts of solar was installed globally. And I think you and I should take a moment

to contemplate that number. So I was thinking when I started like paying a lot of attention to solar professionally in 2008, basically. So I was looking at the chart. And in 2008, we installed maybe five-ish gigawatts globally. So over the course of the time that I've been professionally thinking about solar, it's gone from five to four hundred 40. You predated me, right? Like you were probably back in the one gigawatt days. So I started doing this in 2007.

So not predating you by much. I was covering the U.S. starting 2008 at the same time you were when the projection for installations was like a hand-loaded spreadsheet of discrete assets, plus tallying up a few websites where people attract stuff like in state of California.

Yes, we basically moved from market, in the course of two decades, you've moved from installing in a day what you used to install in a year on a global basis in these markets. The other thing that's remarkable about it is the growth in 2023 alone. Like, we went from 252 gigawatts in 2022

to 440 in 2023. Like, that is not a market that has hit maturity and is starting to reach its asymptote and flatline. That is actually, like, continuing to increase its rate of growth. It's one of the fastest rates of growth since early in this century,

you know, if you were to take just China's installations last year, which is north of 200 gigawatts, in and of itself, it would have been the biggest year in any other year besides 2022. And yeah, this is a theme that we can return to later on as we look into supply chains and things of that, but not only is it looking like it's still beginning to go asymptotic, it's nowhere close to running out of manufacturing capacity headwere. room either, which is pretty extraordinary. And it's a suspension of disbelief moment, even for us

crotchety old solar analysts, to remember that like, no, no, no, no, no, it's quite possible to double this number again in the next couple of decades. Right. A single one-terawatt year is like totally plausible. In fact, we're currently in a dramatic oversupply situation. Module prices have crashed because we are currently super oversupplied despite the size of this market. Right. And the suspension of disbelief. for you, for me, even for other market practitioners, is like, remember that these things go in cycles, that these markets tend to oversupply themselves,

which has a way of becoming a forcing function for the market to grow further. And yes, there's always, I think, a temptation to look for some kind of asymptotic limit here. But every time that we've done that in a considered and rational way, the market is sort of blown right through it, and it's looked very silly in retrospect to sort of impose a preconditional

asymptotic limits to the way that this is going to grow. All right, so let's crow about solar for like one more minute, and then we'll move on from it, which is later on in the deck, slide 66, you make the point that I think everybody knows practically, but it's still kind of remarkable to see on paper, which is that over the course of the last decade, solar modules have both been consistently getting more efficient and cheaper.

Right, and both by leaps and bounds. Yeah. Like, you know, a decade ago, or 2012, let's start, 15% efficiency was your sort of middle market module efficiency. It's now 21% efficiency. That's pretty extraordinary. I mean, that's a 40% relative increase in efficiency, which in and of itself would be yielding you a great deal more energy

and changing the levelized cost of the energy you get from a system. But at the same time, the module, price has gone from $1.9.9 to $12. So you've had this incredible move in prices as well and in efficiency moving up. And again, it's this testament to an incredibly fine grinding effort of improving on the margin in units of like hundreds of millions. At this point, clearly in units of billions of modules every year. Yeah. You know, the thing, one thing that I always point out, though, is that it is now true that actually looking at the cost of the solar module is less relevant than it has ever been historically in terms of the cost of the solar produced, specifically because modules have gotten so cheap. Like, that cost down trajectory, the modules have seen, has not been matched by, I think, literally any other component of the cost stack of solar. We come from the time.

When we started off, the rubric was, well, modules are half the cost of the system. Obviously, that's not the case where I guess you're having a 24 cent per watt fully installed utility scale system, which we don't. So that's something that we've had to adjust expectations-wise. It's also interesting to note that many of the comments that I've gotten all in good faith are people saying, that's not anywhere close to the price. I'm saying, I'm like, well, you are buying modules for a rooftop in California. you're not buying them for a utility field in western China. So, yes, the realized price for many people

was not going to be exactly at that level. But nonetheless, those are the prints. That's what the market is seeing. And it's important to recognize that if module prices hit there and stay there for a while, that will be fine for the market's perspective. But also, to your point, it's very worthwhile to note is that now the improvements have to shift elsewhere.

You've got to get better at all of the other things that flow in. and that are exposed to commodity prices, too, that you can't just sort of wish away. Not just commodity prices, but also cost of financing. We're going to talk about this more later because you have a slide on it. But, like, there is a rational way to reconcile the fact that on one hand, solar module prices have continued to decline. While on the other hand, at least in the United States, the cost of solar PPAs has increased during that same period, right? And that speaks to everything else. All right, but before we get to bad things, let's talk about some more good things that are going surprisingly well, particularly lighting.

So there's two pieces to this, and they're tied to each other. One is, what type of lighting are we installing? And the second is, what is the result in terms of the amount of energy we use for lighting globally? So let's start with the first one. What type of lighting are we installing now? We are installing LEDs. So more than 50% of all global residential lighting sales in 2022 were light-emitting diodes, which is pretty extraordinary, because in 2010, it was 1%.

You know, we're of an age where there were technical and political debates about shifting to compact fluorescence from incandescent bulbs. And what this suggests is, first, that the LED has kind of obviated a lot of that discussion. I think you can probably still buy CFLs somewhere, but LEDs are a far superior option. and we're reaching the point where they will probably, you know, saturate the market. I have a hard time seeing outside of sort of very niche applications where you have any kind of lighting that is not LED technology. But that's a really, really steep leg up.

And it's also persistent. Like when an LED gets installed, it's going to be there. In my previous home, we installed about, I know that we installed about 50 matched LED bulbs in every can in the house. when we moved in, and five years later, I moved out, having never changed a single one of them. Yeah. Yeah, I mean, the two things that are remarkable about this to me. One, the pace, right? Like, we, you know, when you scroll out here, and this applies to solar as well, it's just, that's 20 years, and we went from 1% to 50%. And the second piece, which is related to that, is that that's global, right? More than 50% globally is really impressive.

That includes the global south, right? And so that just speaks to the pace of change as possible, at least in some product categories. Obviously, like lighting is a thing that's turning over more frequently than power plants, for example, or even vehicles. So it's, like, easier to see that quicker. Nonetheless, we're super impressive. And the result of that, of course, is that LEDs are much more energy efficient. And so we have significantly reduced the share of global electricity consumption that is coming from lighting over that period. No, absolutely.

So it's fascinating because we think about the LED is essentially a consumer discretionary type of decision with consumer durable timelines behind it. Like, you know, you make this decision by going to a big box retailer and looking through a set of light bulbs because you need to swap out bulbs. that's these days the decision that you make and pay for with a credit card, but it has these implications as if you were buying an automobile in terms of the timeline that it's effective over it. Yes. Now, lighting is, and this is still totally fascinating to me, is not only a lower percentage of total electricity consumption than cooling,

but even than low-temperature heating in this century. And it's come down from like a share of more than a quarter of all electricity demand at the start of the 20th century, down to barely over 10% of our total electricity consumption from lighting. And that's a function, both of the fact that lighting has become more efficient, and also the fact that we have developed as an economy and are producing more stuff and using more energy for other things, obviously, or more electricity. It's fair to say. In the year 1900, there weren't that many things you could do with

electricity to begin with. How many data centers do you think there were in the year 1900? Very, very few. I'm going to go with no, none, rather. And you just had a, yeah, you had a very limited use. And again, of course, you have to put in the fact that 10% of today's electricity consumption is slightly more as an absolute figure than 25% of the year 1900's electricity consumption. But nonetheless, it's impressive. And I like to highlight things like this because it shows you, A, where successes have been made and B, where these sort of new frontiers of work, to be done have moved. And that's definitely into cooling and into low temperature heat. These are areas that now need to be addressed with electricity,

and the electricity within them need to be addressed as well. All right, we're going to do two more in this category of things that are going pretty well, and you might not have known it. The first one is on land use and deforestation, which, I don't know, you hear a lot about the problems of deforestation.

I'm not sure everybody recognizes that we've actually done a reasonably good job on a global basis of cutting that down. Ha, I didn't even mean that joke as I said it. Fair enough. Cutting it down. Yes. Well, that's highlight within the data that I have heard that I'm looking specifically at the Amazon.

So this is a place probably where the data are the richest and the time series of the longest. But yes, we had about 5,000 square kilometers of deforestation in the Amazon last year, which is like 60% less than it was in the year 2021. and much less, like maybe a fifth of what it was, or even less in the 1990s and in the early 2000s. So, you know, we had this unfortunate run-up in deforestation in the last, like, seven, eight years in Brazil, but that was to levels that was far lower than it had been in the 1990s. Again, like, you know, the rates shrink because there's already a lot of deforestation that has already happened. So the absolute number is cutting into it and also out.

absolutely smaller total area of forest. But it is, it's important to recognize, you know, the real number, because again, from a carbon cycle perspective, this number matters, you know, regardless of what it is. And you want that to be as close to zero as possible. Well, and speaking of the carbon cycle, right, if you look at it from an emissions perspective, and this is not just deforestation, but one of the things, whenever you look at the emissions data and you're like, you know, parsing out the different parts of the pie, there's always this forestry and land use bucket that's always, like, very large. But, you know, sort of confusing to try to understand exactly what that means.

But if you look at the trajectory of emissions in that land use change category, they also have been heading pretty rapidly in the right direction, it seems. That's right. With some very big spikes and with the proviso from all of the researchers to do this, that data tends to be revised later on. But, yeah, we're down from like eight gigatons of land use change emissions in the late 1950s. and some spikes back up to more than seven gigatons in the late 1990s, to like about four right now. So, you know, there's still a lot of emissions that's coming from this. In and of itself, that would be, like, bigger than almost any country on its own right.

But again, trending down and the success that we can look to, but also not trending towards zero. You know, these are things that need to be moved further and faster. And to be thought of, I think, also as a resource. And this is another sort of recurring theme throughout, is like thinking of for the land and how we use it and how we engage with it in a broader sense than just covering it with PV panels or growing corn on it or cutting, cutting down whatever's growing on it and burning it. All right. Last in the category of things that are going pretty well is the trajectory of energy storage on the grid, which is another one, sort of like solar, actually. I mean, it's less mature than solar, obviously. So it's like earlier in that adoption cycle. But similar to solar, the curve is bending upward at the moment on a global basis. It is not flattening out. And in 2023, in particular, it seems that basically nobody predicted how much energy storage

was going to end up being installed on the grid on a global basis. Yeah, my former colleagues at B&EF gapped their projection up like almost 30 or 40%, I think, if I look at the numbers, a really substantial leg up on what had been anticipated to about 100 gigawatt hours of total storage in 2023, up from like 30 or so in 2022. Again, it follows a very kind of solar logic to it as well that I think you and I would find familiar. You don't want a pattern match too much, but a highly distributed resource with manufacturing economics on one end and project developer economics on the other.

Where there's clear market signals, people can deploy fairly fast and move assets into the grid fairly quickly. And to an extent, changing prices also creates its own market. So, yeah, it's a big deal. I mean, again, we should be thinking forward to this on when do we get to our first terawatt hour year at this point. Like, that's where we'll start to see really meaningful contributions. And we'll also start to see changes, I think once we reach that scale in terms of what people are doing with it, it won't just be four hours of storage, it won't just be, you know, it won't just be for frequency regulation of voltage support, stuff like that.

Right. Okay, that's our category of optimism for the day. Now we're getting it into some stuff that's less obviously positive, but interesting, nonetheless. So category two, I just called money, money, money. All right, so we're going to get into the weeds on this one, but I haven't really talked about it on this podcast before, and it's sort of important. which is what's happening with transferability of tax equity in the United States.

So if you already know what I'm talking about, then you don't need this explanation. If you don't, then this isn't going to be sufficient for you. But basically, the Inflation Reduction Act did something important, which is that for the first time, you can transfer your tax equity credits. If you are generating them via a renewable power installation or an energy storage installation, it used to be that you had to somehow consume those credits yourself or, you know, create some complicated financing mechanism for your project so that your tax equity investor was an owner in the asset directly. So now they can be transferred. And that's a new thing as of

the last year. And so we're getting some interesting early data on what's happening with those transfers and what they cost, right? Because somebody else has to buy those credits and they're not going to buy them for a hundred cents on the dollars. So the question from day one was, you know, how are buyers going to be thinking about that? And that matters because it impacts the economics of the project at the end of the day. So with one year of data behind us, what do we know about the cost of transferring tax credits? So what we know so far, and remember, it's a thin field, but it's in a very heartening way growing very rapidly and also becoming increasingly data rich. We're seeing what I think you would hope for, which is that the smallest ticket sizes,

So the smaller the transaction, the deeper the discount to par value is, which is a normal kind of thing for having to deal with the aggregation challenges and the risks involved in smaller assets. The bigger the purchase prices, the ticket size, the smaller the discount to par. So for projects that are or a transfer of under a million dollars, you're getting like an 84 to 86 cent price as opposed to what you say, as 100 cents on the dollar, which gives the investor a quite high IRA, like a 16 to 19 percent, sorry, ROI rather, return on investment.

When you get all the way up to say a $50 million transfer where you're going to be competing with traditional tax equity, but not only with traditional tax equity, but with other risk-free investments, like, say, treasury bills, you're in the like 94 to 96 cent price point and a return on investment of like $3,000. four to six percent. So this is data that basis climate published late last year. Crux has also published some similar data. It's very useful to see all of these numbers because this is how, this is A, what you want to see in an evolving market, and B, I think the sort of pattern that you would expect to see. Like, it would be unusual if you didn't have these spreads between

par value, you know, spread to par value between little and big projects. and if you didn't have changes in return on investment accordingly. What I like about this is that it gives a sort of spectrum of risk appetite and return appetite for investors. So, you know, if you're a retail or you're a small, specialized investor, you may be interested in doing projects under a million dollar ticket size because you're willing to get a 16% return on investment. If you're a very large investment bank, you're probably not expecting to deploy $50 to $100

and receive something that's three times the risk-free rate. So you're therefore looking at pricing points that are probably closer to where T-bills are printing. So I think this is great. Like, A, more transactions the better. B, the more transparency, the better. Because this is a market that looks like somebody will be able to get behind. And I think it would be really healthy to have a much broader market of participants. than the specialists who've been doing it since you and I started doing this work.

It is fascinating. No judgment statement. But a lot of the players in tax equity today, not just the institutions, but the people, are the same ones that you and I would have met for a cup of coffee at a conference in San Diego in 2009. And so it's really valuable to see this expanding and taking on a sort of a platform basis, as opposed to a very bespoke basis. It's sort of like, the analogy would be that it's basically moving from like the bond market to the equity market. It's moving or it's moving from over-the-counter trades to exchange trades.

It's not quite like that yet, but it's getting towards that level of transparency and liquidity, hopefully. Virtual power plants are becoming a reliable way for utilities to manage capacity, But enrolling devices is just the start. What really matters is confidence, knowing those resources will perform when dispatched, and being able to prove it, from the control room to the living room. Energy Hub's platform handles the full picture, from near-real-time forecasting, locational dispatch, and the kind of rigorous verification that holds up when regulators, grid operators, or leadership ask, did it deliver?

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but the future of energy isn't shaped by technology alone. It's shaped by markets, by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, the capital platform for the clean economy. Join me for my brand new show, Critical Capital, as I talk with people deploying capital, shaping policy and building projects. Together we unpack how risk is priced, how incentives are structured, and how progress is actually made. Listen to Critical Capital on Spotify, Apple, or wherever you get your podcasts.

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So speaking of cost of capital, I liked in slide 50 is not like new market data, but it actually makes a really important point that is salient to what's been happening in the market the past couple of years, which is just laying out like at different costs of capital, how much of the total cost of any given project is made up of your finance? financing versus CAPEX and OPEX together. So, as you point out, and this is just taking for

like a renewable project, right? And so we know the thing about renewable projects is that they're all upfront CAPEX, basically, and the OPEX is very small. They're particularly sensitive to those costs of capital. And as you point out, with a 4% cost of capital, 75% of the overall project cost

is borne out of the project itself, CAPX and OPEX. 25% is financing, but if you're up in the 12% cost of capital range, now 60% of your total all-in project cost is your financing. And I think that goes a long way toward explaining why it's been such a big deal that interest rates went way up over the past couple of years. Absolutely. We had this sort of holiday from rates history for almost 10 years in which the cost of capital at the risk rate was basically zero, and you could borrow long for long-dated assets at extremely low rates, and you could sort of not have to think too much about the impacts

of the cost of capital on your asset because the cost of capital was so low. Now, unwinding that, getting back towards an actual rates expectation of three to four to five, six percent, and that's in develop markets, means that, yes, the cost of money is a huge lever on the cost of your delivered energy from a project. And it's very tricky because there's only so much engineering you can do to get yourself to the lowest rates you want. Like, sort of, when the rate is, you know, when the rate is zero, you maybe don't even need to engineer that much at all. You know, you get as close as you can to it and you're in a, you know, a realized rate of like a couple of percent. But it's going to be unlikely to go below the risk-free rates of capital.

You're always going to have some sort of buffers on top of them. And some of them could be very substantial, as you see in some markets. You know, the adders onto the risk-free rate could be adjustments for currency risk, adjustments for sovereign risk. And you'll be at the point where your cost of capital is 11% or 13%. Like it does happen in markets like South Africa or India. And so the single biggest never you could have to move that is the risk-free rate itself. but the real challenge for the industry is that it's hard to think of a more exogenous force than that. Like, there's not really a way that as a developer I can go in and be like, yep, thanks to my good work,

I've managed to move the secured overnight financing rate down by 75 basis points. You are almost purely a taker on it, and you are subject to and captive to whatever's happening in the rest of the economy. Right. the last thing on my money, money, money category that I thought was actually really interesting analysis is in slide 55, you're talking about what it would have looked like had you done a long short strategy, which you should explain what that means for anybody who doesn't already know, where you're a long, clean energy, short traditional energy, and then how the returns on that strategy would have changed over the past six years or so. So first, just briefly explain a long short strategy. I'm sure most people know, but just in case. And then how would the returns have changed? Long-short strategy is that you are looking for growth and you're positioned for growth in one basket of securities, and you're expecting a decline in another basket of securities. So in this case, the long short, and this is research from Bernstein, says the I shares global clean energy ETF, you go long that, and you go short, the I share's global energy ETF. And look, for three years, pretty good outperform.

2019, 2020, you had 17, 13, and 160% outperform excess return from this long, clean, short, dirty strategy, which kind of unwound. So it would have really stung in 2021 when that strategy went to a negative 77% excess return. That's some sophisticated language to say you lost quite a bit. negative 29% negative 40% through September of 2023. So look, I mean,

there's a lot of stuff going on here. One thing, valuations came back down to earth for a lot of these clean equities. There was a lot of

cleanup happening within the global energy ETF components. So companies de-levering, which definitely in the oil and gas sector is going to mean

that they're much better able to return share to cash to shareholders. You also had a lot of buybacks. you had companies that are propping up their share price by devoting cash towards removing their total number of shares and therefore driving prices up. You know, it's complex.

Like, I think I didn't do this math here. You could take this math starting with, you know, a rebased value of 100 and see if you made money over the long run through this strategy. You might have, but it would have been a bit of a roller coaster to get there. And probably not the way that you would want to get towards kind of. of your S&P 500 index equivalent return. Like you probably don't want for the sake of being an indexed investor to reach your 10 to 12% annual return or whatever that number might be

by being up 160% one year and down 77% the next year. There's also like an interesting philosophy embedded in that strategy, right? That strategy effectively says, I expect clean energy to win at the expense of traditional energy. Now, in the long term, that probably is a reasonable thing to bet on. Like, ultimately, if you expect a 30-year positive trajectory for clean energy, like, of course, that's going to come at the expense of traditional energy. In the short term, it's not entirely clear to me that that's true,

at least not in an equities context. And so there was a period of time when actually both of them were, like the energy sector was performing really well, and you could have defined energy sector as traditional or clean, and either way you would have been looking good. that turned a little bit when, when, you know, interest rates rose and oil and gas prices rose and all that. And so that then made the traditional energy perform much better than clean energy for the past couple of years. But my guess is not having done this analysis, you probably would have done better if you had just gone long, clean energy and then forgotten the short position on traditional energy.

That's probably, that's probably, well, I don't know, I couldn't speak to that. But it would be simpler, that's for sure. I would agree completely that there is this sort of false sense of correlation between if long this, then short that. I agree with that very much. They just don't, like, they don't necessarily correlate that way. An analog to this is the assumption, say, six, seven years ago that you will divest from fossil fuels and therefore put all of your money into clean energy equities. In fact, it was 10 years ago now that I wrote a white paper about all of that. And kind of tried to emphasize, hey, you know, if I'm moving $5 trillion out of oil and gas and coal equities at the time, I don't have $5 trillion worth of clean energy stocks to put it into.

And I also have particular types of return thresholds that I'm used to. I might want a lot of yield, so I'm probably going to go into real estate. Or I might want a lot of liquidity, so I'm going to go into tech. Or I want a lot of diversification, so I'm going to go into any number of other index. Like the one does not follow from the other. That's a sort of larger, a larger story slash lesson about divestment that, you know, we could discuss at another time. But like, yeah, the one, going long one thing does not necessarily mean being short something else. All right.

That wraps up our category two, money, money, money. Let's move on to category number three, which is trends in technology. Starting with, we talked about how big the battery market is now. let's talk about who's making those batteries. So slide 63 makes the point that I think probably folks appreciate generally, but it's still fairly remarkable that it is true, which is that all 10 of the top 10 largest battery cell manufacturers are now in Asia. A goose egg for the rest of the world in the top 10.

In fact, all of the others are 6% in total. You mean the total aggregate Asia-based battery cell manufacturing is 94, or close to 94% of global production? I believe so. So there's just not a lot of stuff happening elsewhere yet. That there's a lot under construction. There will be some changes there. And remember, this market is very, very big.

You can still have really, really big scale happening, you know, in the 50 to 100 gigawatt hour, probably capacity capabilities in other countries that get stood up. But, yeah, look, it's China and first and second. it's South Korea in third and fifth. It's Japan in fourth. And then it's China, Korea, China, China, China, China from there on as you go down the list. I believe it was also the first year of producing a terawatt hour worth of batteries, which is notable. But yeah, this is not a new story.

I guess what's notable is that it hasn't particularly changed that much. I could go back and compare this to last year, but this is directionally pretty much exactly where it was. in 2022. Yeah. And one thing that is different about batteries thus far from solar, solar also moved all to Asia,

but it ended up being in solar almost exclusively Chinese companies. Now, over time, those companies maybe were producing in Southeast Asia because of tariffs and all sorts of other things, but the epicenter

of solar manufacturing moved entirely to China. Now, in batteries, as of today, South Korea, between LG, S,K, Samsung, and then Japan with Panasonic,

they still have a pretty prominent role. And so it'll be interesting to see whether that sustains over time, because obviously the big growth companies, the big winners of the past few years, have been CATL and B-YD, who are the numbers one and two now. That's right. And to see where are those, you know, what's the go-to-market outside of Asia as companies expand,

you know, as they build new capacity in other places, who are they going to build with? Who are they going to partner with? You know, some of them might be North Volt style and be building their own stack, but others will be partnering with companies, and who are they going to partner with, is going to be the real question.

The other thing to me that I think maybe not everybody appreciates is that actually technology changes pretty quickly in battery world. At least it has as of late. And the perfect example of that has been the pace of the shift to LFP batteries for electric vehicles, right? You point out in the next slide in 64, you know, LFP went from 5% of, EV batteries in 2019, not that long ago, to 42% in 2023. That's a very quick turn for an industry

that requires giga-scale manufacturing to make a meaningful share of the market. This is a very big deal. This is really important to see that lithium-iron phosphate batteries went from like de minimis share of market to almost half in five years of time. This is largely a function of the Chinese EV market and of deployment within that particular market. But I have to say that it's unlikely

that this capability and this chemistry is going to be ring-fenced to China forever. And the spill on effects of having LFP batteries elsewhere in the world in other applications is going to be a really big deal. I just, you know,

I like this quite a bit because it's something that I, where I really have to interrogate my priors from SOMER, which is one chemistry tends to sort of wipe the floor with another, and that's it. Or one configuration tends to sort of blot out everything else with the exception of some really application-specific things. In batteries, I think we will see a world where you've got some separation based on use cases. You know, there will be the NMC batteries that get used for hypercars and for aviation, and maybe the LFP battery becomes much more common

for your sort of bulge bracket or middle market automotive applications, and then you'll have batteries that use sodium, for instance, that will find their way into the system as well. It's another case wherein, you know, the exceedingly fine grind of volume manufacturing has a way of moving capability pretty relentlessly. And the really great thing is that when these things leave the lab bench and enter into volume production with manufacturing,

is you get visibility on them. And I think it's really important, as a sort of aside, to watch the market data as opposed to what's coming out of just pure research. The research is fascinating. It's like an advanced look on the future. But the data, where in a large company makes a commitment to do something at scale, means that they think it's going to work, and it's likely to at least find some application where the market can test it.

Okay, speaking of markets moving quickly, but for different reasons. Let's jump to slide 71, which is about residential solar in California. And basically, I think anybody who's in the residential solar market knows that this has been going on, but California revised net metering policies, basically in a way such that when it has eviscerated the market,

like the overall volumes of residential solar have gotten killed. But to the extent that residential solar is still getting installed, all of a sudden, it is largely using batteries. That's right. There's a persistent, cheeky header that I keep using on these slides, which is markets respond to incentives, and then in parentheses, again. People keep thinking that when I say that, that I mean that they respond to positive incentives, but markets respond to negative incentives too. And yes, basically, if you no longer have the policy-gifted economics of net metering working in your favor, and you still want to do solar, well, magically, you now need to, to attach a battery to your asset in order for it to make any kind of economic sense. Again, this is a case where, like, I feel like this is a very intended consequence, if I'm a policymaker, like, you should know very well that this is what was going to happen. If you introduce this policy, you're going to significantly impair a market.

But the flip side of that is for the admittedly smaller market that persists in residential solar in California, it now looks very different. because attaching batteries makes economic sense. And you'll start to see new optimizations being built around that. But yeah, it's very, very fast. It was like a couple of percent of systems had a battery attached in the middle of 2023, and now, like, almost 25 percent do. And for some installers, it's, like, well over 50 percent now.

I'm sure. It's just going to be the norm in the market. Oh, just because economically it makes way more sense, not the only way it makes sense. Magically, it makes sense. You know, we think about markets being willed into being by a new subsidy, coming into place or a new support mechanism, but they're also willed into being by other mechanisms going away.

Right. Staying on the battery theme for a second, we're going to jump to talking about the cost of batteries and what has changed there, because this has been another interesting market dynamic that we haven't talked about a whole lot here. So jumping all the way to slide 145, lithium prices have gone on quite a wild ride

over the past couple of years and then have had a direct result on battery prices over the last. that same time. Absolutely. So, yeah, the prices went up buying like a factor of about 10 over the course of two and a half years from January 2020 to like the middle of 2022, late 2022, and then collapsed. Again, this is a sort of supply demand thing. There's there, there are elements within the market of how products are traded and things like that that are a little bit outside my gift to explain. But the effect for battery makers is that you, had to absorb or blunt this massive run-up in the cost of lithium that then collapsed and

will eventually see its way through to the product that you deliver. You know, contracts, depending on the sort of elasticity or stickiness of contracts, you may find yourself in a position where you have pre-sold things based on prior prices that you can now use to your advantage with the new prices of inputs. But in the long run, it will have to mean that battery price is probably come down and get closer towards their cost of goods sold. It'll be hard to drive a persistent wedge in a competitive market like that forever. So, yes, good for the battery market.

In a complex signal, I would say, for the necessary exploration that might need to come to have more lithium resources come online. It'll be an interesting signal for somebody who might be preparing to go plan new mining operations. But again, part of a complex interplay then back again with, say, batteries that use NASN lithium or use no lithium to think about how that's going to play in the long run. Yeah, that means a classic, the solution to high prices is high prices, the solution to low prices, is low prices. So the question is the timing of both of those things and how long it takes for all the incentives to flow through. Speaking of batteries, another thing we haven't talked about here that you have the data that I've been wanting to point out for a while and indeed have had to point out many times because, you know, we're on the investment side, we're looking at lots of companies that want to be doing battery recycling. There's a fundamental challenge with wanting to be a new battery recycling company right now. And that has to do a supply and demand of recyclable batteries.

So walk us through where we are on the supply demand equation for recyclable batteries. So this is slide 150, and it's some just fantastic data from the folks at circular energy storage. Like you, I had been looking for this for a really long time. And the simple fact is that we have vastly more material recovery capability than we do supply of things to be recycled. So the ability to recycle is way outstripping the material that is coming in to be recycled and that is likely to be recycled pretty much all the way. way through 2030. And there's a lot of nuance in the way that this might evolve in the market.

First is like, you know, you could change the supply side by having end-of-life battery supply go way up. Like the end-of-life of batteries could be happening faster than people expected or in greater volume. And that could push up closer to what the ability to recover material is, getting supply and processing capability closer in line. But the other one is, what is the end of life for the battery? And I think to me, this is the biggest question, the sort of unwritten question within this chart is like, the end of life for somebody's like high-performance Tesla battery driving it in Orange County, California, is a different concept of end of life than it might be if it's being shipped to Eastern Europe or Southeast Asia

where people are going to continue to use it and drive it. You know, we had this question decades ago with Prius batteries, like do they get charged? chopped up and turned into scrap or recycled, or do they go on to, like, be somebody's grid application, or off-grid application, rather? A really, really big question. Yeah, but, like, the numbers are stark here is the point that I would make. According to these numbers, right? And this is looking at, like, announced capacity for battery recycling, for end-of-life processing and material recovery, versus projected end-of-life batteries in production scrap. So either of those numbers can move, as you said. But,

according to the numbers that circular energy storage compiled will be in 2030 will be at about 2 million tons per year of combined end-of-life batteries and production scrap versus 10 million tons or so of capacity for material recovery and processing. So there's a 5x gap there, which is like that that's a problem, right? That means on average those material processing and recovery facilities will be operating at 20% capacity. Now, in reality, a bunch of them are not going to happen because of this, and some others may get to 100%. But to me, if you are thinking about doing battery recycling right now and you're not already at scale sourcing feedstock, that is question number one, two, and three, because you are headed into a market that is

pretty clearly going to be oversupplied from your perspective. A hundred percent. And it's always worth, you know, to reiterate, it's worth remembering that you're competing not, you know, you're competing in that end of life category, not just with every other end of life battery that might be recycled, but with other uses, with end of life question mark. Like, what is the end of life for that product? And, you know, from a material efficiency perspective, it's still going to be way more efficient to keep using that battery as long as you can than to send it off to the battery bone yard. Right. Okay. I think we've gotten through roughly half of the many slides that I pre-selected here. So let's call it for today,

and we'll come back next week and pick up with my next set of carefully curated slides from your deck. Sounds good to me, show. Nat Bullard is a longtime climate tech analyst and writer. He is formerly of Bloomberg, now doing his own thing, including writing this deck. This show is a production of Latitude Media. You can head over to Latitude Media.com for links to today's topics. Latitude is supported by Prelude Ventures. Pralood backs visionaries, accelerating climate innovation that will reshape the global economy for the betterment of people and planet. Learn more at PreludeVentures.com. This episode was produced by Daniel Waldorf. Mixing by Roy Campanella and Sean Marquan. Deem song by Sean Marquan. I'm Shale Khan, and this is Catalyst.